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Saving Social Security Disability Insurance
Reforms within the Context of
Holistic Social Security Reform
Jason J. Fichtner and Jason S. Seligman
March 2015
MERCATUS WORKING PAPER
All studies in the Mercatus Working Paper series have followed a
rigorous process of academic evaluation, including (except where
otherwise noted) at least one double-blind peer review.
Working Papers present an authors provisional findings, which,
upon further consideration and revision, are likely to be
republished in an academic journal. The opinions expressed in
Mercatus
Working Papers are the authors and do not represent official
positions of the Mercatus Center or George Mason University.
-
Jason J. Fichtner and Jason S. Seligman. Saving Social Security
Disability Insurance: Reforms within the Context of Holistic Social
Security Reform. Mercatus Working Paper, Mercatus Center at George
Mason University, Arlington, VA, March 2015.
http://mercatus.org/publication
/saving-social-security-disability-insurance-holistic-reform.
Abstract Many Social Security reform proposals have emphasized the
role of savings over insurance, focusing on retirement. In
contrast, disability in prime working age is harder to save for and
thus is arguably better considered an insurable event. However,
unlike determination processes for many other catastrophes, often
disability determination appears inherently relative and somewhat
subjective. For these reasons, most social insurance reform
proposals have advocated treating reform of disability insurance
separately, subsequent to any reform of the retirement system. This
paper focuses on disability insurance but makes the case for
considering reforms in tandemthat is, (1) developing disability
program reforms that accommodate plausible retirement program
reforms while properly aligning incentives to support work and
savings and (2) providing a financially secure, vital safety net
for disabled Americans. JEL code: H55 Keywords: Social Security,
disability insurance, retirement, Social Security reform, Social
Security Disability Insurance reform Author Affiliation and Contact
Information Jason J. Fichtner Senior Research Fellow Mercatus
Center at George Mason
University [email protected]
Jason S. Seligman Assistant Professor John Glenn School of
Public Affairs Ohio State University [email protected]
Acknowledgments We acknowledge the RAND Corporation for use of
data and facilities in work with involuntary retiree data in the
Health and Retirement Study, the Mercatus Center at George Mason
University for encouragement in developing this policy piece, and
Neil Townsend for research assistance. All studies in the Mercatus
Working Paper series have followed a rigorous process of academic
evaluation, including (except where otherwise noted) at least one
double-blind peer review. Working Papers present an authors
provisional findings, which, upon further consideration and
revision, are likely to be republished in an academic journal. The
opinions expressed in Mercatus Working Papers are the authors and
do not represent official positions of the Mercatus Center or
George Mason University.
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3
Saving Social Security Disability Insurance
Reforms within the Context of Holistic Social Security
Reform
Jason J. Fichtner and Jason S. Seligman
The Landscape for Reform of Social Security and Disability
Insurance
In the United States, Social Security reform proposals often
have emphasized the role of savings
over insurance and, more popularly, focused on retirement
instead of disability. Disability in
prime working age is harder to save for and so is arguably
better considered an insurable event.
Although saving for disability is difficultespecially at earlier
stages in a career lifecycle
insuring against it presents challenges as well. Chief among
these challenges is the fact that, in
the majority of cases, the determination of disability is not
obvious, and disability is not a binary
state. Thus, determination appears inherently relative and
somewhat subjective.
For these reasons, most pension reform proposals have advocated
treating reform of
disability insurance separately, subsequent to any pension
reform. In other words, reforms to the
retirement component of social insurance often have been
proposed without consideration of
needed reforms to the disability component of social insurance.
We argue that reforms to both
components should be considered in tandem.
The US social insurance program is primarily funded with
matching worker and
employer payroll tax contributions, which are divided into
legally separate trust funds for
retirement and disability. Possible reforms to help meet goals
regarding the adequacy of benefits
and the solvency of public disability and retirement programs
include adjusting the allocation of
withholdings between the retirement and disability trust funds,
allowing interfund borrowing,
and adjusting benefits. This paper also discusses other reforms
that would fundamentally change
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4
the structure and the incentives of the program. Some of the
ideas presented are based on earlier
writings by the authors.1
The Great Recession, like other recessions since 1965,
dramatically increased the number
of disability applications and awards. For many people, the US
disability program now serves as
an early retirement program, which has resulted in a
commensurate increase in public financial
burdens.2 Against this backdrop of increasing structural and
cyclical growth, the Disability
Insurance (DI) trust fund is stressed and the Social Security
trustees now estimate that it will be
exhausted in 2016,3 less than one year from the publication of
this paper. Consequently, the
program actually needs to be reformed before the retirement
program.
The retirement program, the Old-Age and Survivors Insurance
(OASI), has its own
separate trust fund, which is projected to become insolvent in
2035. On a combined basis, the
two trust funds have a projected insolvency date of 2033. Should
DI be considered for reform
first, anticipating the magnitude and type of potential
spillover effect and any subsequent
program reforms to Social Securitys retirement program will be
important. Alternatively,
Congress could pass legislation to direct more money to the
disability program and less to the
retirement program trust fund as a stopgap measure to extend the
solvency of the DI trust fund.
1 Fichtner and Seligman (2014) consider how a hybrid
privatepublic Disability Insurance (DI) system might workalong with
optimal time paths for reformsby analyzing German reforms and
public reactions over time as an allegory of the US case. In
comparison, this piece (1) focuses more narrowly on the United
States, (2) employs more recent data, and (3) further develops work
by the authors on how DI and OASI (Old-Age and Survivors Insurance)
currently contend with involuntary retirement as a result of both
health and economic shockslooking at how Social Security
Administration program use has evolved during the Great Recession.
2 Whereas the average age of disabled-worker beneficiaries has
increased, from age 51.0 in 2002 (US Social Security Administration
2003) to age 53.2 in 2012, retirement ages have increased since the
turn of the century as well (US Social Security Administration
2013). Providing important information for both structural and
cyclical shocks impacts on disability finance, Bentez-Silva,
Disney, and Jimnez-Martn (2010, 1) find that for a range of
countries and data sets, levels of claims for disability benefits
are not simply related to changes in the incidence of health
disability in the population and are strongly influenced by
prevailing economic conditions. 3 See Board of Trustees of the
Federal Old-Age and Survivors Insurance and Federal Disability
Insurance Trust Funds, The 2014 Annual Report of the Board of
Trustees of the Federal Old-Age and Survivors Insurance and Federal
Disability Insurance Trust Funds (Washington, DC: US Government
Printing Office, 2014), http://www
.ssa.gov/OACT/TR/2014/index.html.
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5
Three possible stopgap measures could yield similar results: (1)
merging the two trust
funds, (2) reallocating payroll withholding portions from the
OASI to the DI trust fund, and (3)
having the DI trust fund borrow from the OASI trust fund to make
DI payments in full. Each of
those measures requires Congress to pass legislation.
If payroll tax receipts are reallocated from the OASI trust fund
to the DI trust fund, the
current split of 85:15 could approach or exceed 82:18.4
If the DI trust fund borrows from the OASI trust fund, the rate
of interest would have
to be determined. Of the many possible interest rate selections,
the easiest and most
straightforward would be to have the DI trust fund pay the same
interest rate that any
borrowed funds would have received had the money remained in the
OASI trust fund. That
rate is already determined by law.5
In any of those cases, with a loan on the books, the future
adjusted DI withholding rate
would have to be sufficient to both pay for current benefits and
repay the loan. In other words,
the eventual ratio of DI to OASI withholding rates would further
nudge upward as a result of a
temporary borrowing strategy, or the DI program would need
sufficient reforms to both restore
solvency and repay any loan to the OASI trust fund.
The OASI and DI trust funds are legally separate because they
are designed to serve
different purposes and different populations.6 However,
historically the financial assets of one
trust fund have intermittently been used to financially shore up
the other, whether through a
4 The current total payroll withholding rate is 12.4 percent, to
a maximum of $117,000 (2014), of which 1.8 percent of current
payroll is allocated for DI; the rest, 10.6 percent, is allocated
to the OASI. A potential reallocation of the payroll tax could be
approximately 10.2 percent for OASI and 2.2 percent for DI. See
Social Security & Medicare Tax Rates, Social Security
Administration, accessed March 3, 2015,
http://www.ssa.gov/oact/progdata/taxRates.html. 5 See Interest
Rates, Social Security Administration, accessed February 16, 2015,
http://www.ssa.gov/OACT /ProgData/intRates.html; Interest Rate
Formula for Special Issues, Social Security Administration,
accessed February 16, 2015,
http://www.ssa.gov/OACT/ProgData/intrateformula.html. 6 See
http://www.ssa.gov/OACT/ProgData/fundFAQ.html#a0=0.
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reallocation or through interfund borrowing.7 Even so, sharing
resources between trust funds is
not part of current law and has to be proactively legislated
each time, which calls into question
the continued utility of maintaining legally separate trust
funds. Merging the OASI and DI trust
funds and their obligations would create the least amount of
unnecessary fiscal accounting and
associated stress. Furthermore, merging the two trust funds
would acknowledge that some
interaction effects exist between the two programs. For example,
a reform to the retirement
system to increase the retirement agewithout changes to the
earliest eligible age for retirement
benefitswould make disability benefits more financially
advantageous to those younger than
full retirement age and would put additional financial stress on
the disability program.8
Merging the two trust funds would have its drawbacks, however.
The programs were
designed for separate insurance purposes: one insures in case of
disability, whereas the other
insures against old age and for surviving a spouse. If the two
trust funds were combined, any
financial or operational problems associated with the individual
programs may receive less
attention, and policy attention could be diverted from future
needed reforms.
However, none of the options discussed would alleviate the
fiscal stress placed on the US
budget by short- and long-term unfunded obligations via the
Social Security Program. Any one
of the three options (merging the funds, allowing for a payroll
tax reallocation, or interfund
borrowing)without meaningful structural reformsonly delays the
day of financial reckoning.
Further, any stopgap resolution of the pending 2016 DI shortfall
does nothing to solve the
underlying disincentives inherent in both the disability program
and the retirement program that
7 Geoffrey Kollmann, Social Security: Summary of Major Changes
in the Cash Benefits Program, CRS Legislative Histories 2
(Washington, DC: US Social Security Administration, 2000),
http://www.ssa.gov/history /reports/crsleghist2.html. 8 See, for
example, Pat Vinkenes, Alice Wade, Mark Sarney, and Tim Kelley,
Considerations for Potential Proposals to Change the Earliest
Eligibility Age for Retirement (Policy Brief No. 2007-01, Social
Security Administration, Washington, DC, 2007),
http://www.ssa.gov/policy/docs/policybriefs/pb2007-01.html.
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discourage work, saving, and investment. In other settings, when
reforms have been successful at
restoring actuarial solvency and fiscal balance, reforms have
been integrated. (A key example is
Germany, which engaged in a decade of incremental holistic
reforms, as detailed in Fichtner and
Seligman [2014].) For those reasons, the authors of this paper
argue that meaningful reforms to
the Social Security system are necessary now, and temporary
funding measures that only delay
the programs collapse should be avoided.
Previous proposed Social Security reforms generally have focused
on the retirement
(OASI) program and paid less attention to the disability
insurance (DI) program; consider the
Greenspan Commission reforms (Greenspan Commission 1983), the
2001 Bush Administration
proposal (Moynihan and Parsons 2001), and the Bipartisan Policy
Commissions proposal
(Domenici, Rivlin, and Debt Reduction Task Force 2010). In all
three cases, retirement benefits
were reduced whereas disability benefits were not, regardless of
age or degree of disability.9 One
major exception was the Reagan Administrations effort to tighten
eligibility rules for the DI
program. However, that effort led to a significant number of
people losing their disability
benefits. In 1984, Congress passed, and President Reagan signed,
the Social Security Disability
Benefits Reform Act, which was intended to provide a more
uniform process for disability
determination.
Failure to consider DI as part of larger retirement reforms is a
mistake. The longer
pension reforms are delayed, the more likely any reform will
entail both tax increases and benefit
reductions. Any reductions in retirement benefits without tandem
changes to the DI program will
tend to make the disability program relatively more attractivein
particular because of the lack
of temporary and partial-disability awards under the current US
system (a lack of partial awards
9 In the DomeniciRivlin proposal, disability benefits actually
can be higher before retirement age than after.
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8
and of explicitly temporary awards makes any DI award more
valuable to the recipient).
Although DI payments may be terminated as a result of either a
return to the labor force or a
disability reevaluation initiated by the Social Security
Administration (SSA), in practice those
are relatively rare events.10
Overview of the Interrelation of the Social Security,
Retirement, and Disability Systems
The US social insurance system includes components for
retirement, disability, and health
insurance. Each component is segregated into general and more
chronic welfare-support
functions. The welfare functionsSupplemental Security Income
(SSI) and Medicaiddo not
have trust funds. The primary focus of this paper is on
disability, in the context of system
reforms. Following is a description of the disability programs
development.
The Social Security Disability Insurance program was created in
1956 to insure against
loss of income should a worker become disabled. The program has
been expanded several times.
The most meaningful expansion came in 1965 with the broad
expansion of cash and health
insurance benefits. Those individuals who apply for DI coverage
may also apply for SSI, which
pays benefits to disabled adults and children who meet SSIs
strict income and asset test. Persons
older than age 65 without disabilities but who meet the income
and asset test may also be eligible
for SSI benefit payments.11 As noted earlier, the SSI program is
funded out of general revenues,
not payroll taxes or trust fund assets. DI applications
currently are complements to SSI
applications in a significant percentage of cases. Thus, even if
the DI program were not fiscally
10 In December 2012, a total of 10,088,739 people received
Social Security disability benefits. In 2012, fully 104,902
beneficiaries (or approximately 1 percent) had their benefits
terminated for not continuing to meet the plans requirements, one
of which was earning the substantial gainful activity amount or
less. See http://www.ssa
.gov/policy/docs/statcomps/di_asr/2012/sect03f.html#table50. 11 For
more information on the SSDI program and the Supplemental Security
Income program, please see http://www.ssa.gov/pgm/disability.htm
and http://www.ssa.gov/pgm/ssi.htm, both accessed June 14,
2014.
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challenged in the short term, increasing dependence on DI by the
US worker population would
burden the United States generally.
DI recipients traditionally also qualify for a third public
program, which grants them
health insurance. Medicare is available to the disabled two
years after the determination date of
their disability. The program requires premiums for some
important benefits, but historically
those premiums have covered less than the full actuarial cost of
insurance for an elderly
population, the remainder being subsidized by the US federal
government.12 Those individuals
who are eligible for SSI are also eligible for Medicaid, which
requires no premiums and is fully
financed jointly through the US and the 50 states budgets.
Unlike Medicare, Medicaid does not
require a two-year waiting period, and this public insurance
program often retroactively covers
urgent care. Fichtner (2014) explains many of the recent
dynamics for this program, including
the effect of the Patient Protection and Affordable Care Act of
2009 (ACA).
All this integration, which is the result of careful attention
by the SSA and Congress, is of
tremendous benefit to families burdened by permanent and severe
work disability. However, one
set of laws that is not integrated in the system is those under
the Americans with Disabilities Act
of 1990 (ADA). That omission is likely because the ADA is
regulatory in nature; being employer
administered, it is not programmatically linked to the SSA. That
unfortunate segregation creates
discrete gaps between the administration of accommodation on the
part of the employer and
assistance through Social Security. Employers and individuals
each lose because of the lack of
fuller labor markets. The tax base is burdened with greater
expenditures and lower revenues,
which increase rates on a narrower base, with all the resulting
inefficiencies.
12 For more information, see C. Eugene Steuerle and Caleb
Quakenbush, Social Security and Medicare Taxes and Benefits over a
Lifetime (Urban Institute, Washington, DC),
http://www.urban.org/UploadedPDF/412945-Social
-Security-and-Medicare-Taxes-and-Benefits-over-a-Lifetime.pdf.
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10
Thus, for all the reasons just described, reforms for DI have
implications for the OASI
and Medicare trust funds, for the general fund via SSI and
Medicaid, and, most importantly, for
individuals welfare. In short, DI reforms are broadly of value
for the general US fiscal picture in
the short term and for the United States over the long term.
Social Security Disability Insurance, as designed, provides cash
benefits for individuals
who cannot work as a result of a medical condition that is
expected to last 12 months or longer or
result in death. Legal definitions of what constitutes
disability vary, and, as noted earlier, the
program does not currently allow for temporary or
partial-disability payments. An applicant is
determined to be either fully disabled or not disabled. The
following are examples of people who
fail to be considered disabled: (1) a person suffering from back
pain who is able to work only
part time, (2) a person who cannot work even part time but who
is expected to recover in 6 to 10
months, and (3) a person temporarily disabled because of
pregnancy.
By contrast, the private market and the US Department of
Veterans Affairs (VA) are two
other DI outlets. Private insurers generally offer both short-
and long-term DI, which can usually
be purchased separately or in tandem. The VA offers
partial-disability awards to military
veterans, thereby acknowledging that some disabilities
completely prohibit the ability to work,
whereas othersto a lesser degreelimit opportunities. However,
neither the private market nor
the VA covers anywhere near the same percentage of the US
population as does Social Security.
The application process for Social Security Disability Insurance
can be confusing and
lengthy. Applicants for DI can apply either at a Social Security
field office (in person or over the
phone) or online. Field office personnel first make sure the
applicant is covered by the program.
To be covered, an applicant must meet certain
participation-related requirements, including
having worked long enough in DI-covered employment and having
paid payroll taxes into the
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Social Security system. Next, applicants are screened for
earnings and for evidence of a health
impairment that results in disability. If an applicant has an
illness that is included on a list of
medical impairments, the applicant is awarded benefits.13 If
not, then the case worker evaluating
the application examines whether or not the applicants claimed
impairment prevents him or her
from working. If so, benefits are awarded.
Applicants who are rejected may ask the SSA to reconsider the
decision. Almost 90
percent of rejected applicants appealed at the reconsideration
stage in 2005, but only 13 percent
had the decision overturned and were awarded benefits at that
stage of the application process
(Autor and Duggan 2010, as reported in Lindner and Burdick
2013). Those applicants who are
still rejected have the option of appealing further to an
administrative law judge (ALJ), appeal
council, and federal court. The majority of denials that reach
the ALJ level are reversed, and
applicants are then awarded benefits.14 Given the high variation
of ALJ decisions and the need
for a transparent and equitable decision process, the SSA makes
available to the public data on
each judges overall decision for awards and denials.15 The
waiting time to have a case heard by
an ALJ varies by office but can be well over a year.16The basic
schematic design of the current
system is shown in figure 1.
A striking discontinuity exists between (a) staying in the
workforce and seeking a work
accommodation under the 1990 ADA and (b) exiting the workforce
to apply to the SSA
disability program. Having presented some basics regarding the
program and its growth over
time, we now consider DI in the context of the funding of the
Social Security system. The overall
financing of the system is depicted in figure 2.
13 See
http://www.ssa.gov/disability/professionals/bluebook/AdultListings.htm.
14 See
http://oig.ssa.gov/sites/default/files/audit/full/pdf/A-07-12-21234.pdf.
15 See
http://www.ssa.gov/appeals/DataSets/03_ALJ_Disposition_Data.html.
16 See
http://www.ssa.gov/appeals/DataSets/01_NetStat_Report.html.
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Figure 1. Current Integrated System Design
Note: ALJ = administrative law judge; DI = Disability Insurance;
HI = Medicare Part A Hospital Insurance; OASI = Old-Age and
Survivors Insurance; SSI = Supplemental Security Insurance.
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13
Figure 2. Basic Financing of the US Social Security Retirement,
Disability, and Health Insurance Systems
Note: DI = Disability Insurance; OASI = Old-Age and Survivors
Insurance; SSI = Supplemental Security Insurance. The figure
details funding mechanism by entity (columns) and program type
(rows). The first column describes stores of assets (trust funds).
Need-based programs (Medicaid and SSI) do not have trust funds but
instead rely exclusively on tax revenues at the federal and state
levels for funding. Medicare further relies on insurance premiums,
deductibles, and copayments from participants.
Wage Withholding Rates
as percent of maximum taxable earnings
OASI 10.6
DI 1.8
0.0
Medicare 1.4(part A)
0.0
ProgramTrust Funds
DI
OASI
Medicare
There is no Medicaidtrust fund
Medicaid
SSIThere is no SSI
trust fund
Inco
me
Health Insuranc
e
as percentage of maximum taxable earnings
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The top left corner of the diagram illustrates that the
retirement and disability aspects of
the Social Security system are managed via two separate trust
funds, which are depicted as
separate parts of a single cylinder. Although those programs are
the primary focus of this paper,
considering the whole diagram is useful; as stated previously,
any systematic reforms to the
Social Security retirement or disability program will affect not
only wage withholdings and
benefits but also possibly SSI, Medicare, and Medicaid outlays,
with impacts for federal, state,
and individual budgets. We will describe a few particular
interactions regarding the welfare and
health insurance programs when we discuss potential reforms
later in this paper.
Focusing just on the DI program, outlays have doubled over the
past decade and are
projected to continue to rise. In 2002, the outlays totaled
nearly $68 billion (0.61 percent of gross
domestic product [GDP]), whereas revenues were more than $87
billion, resulting in a surplus of
$19 billion.17 In 2012, outlays for the disability program
totaled $140 billion (0.86 percent of
GDP), whereas total revenues were only $109 billionleaving an
annual cash-flow deficit of
approximately $31 billion (paid through a reduction in trust
fund assets). As mentioned
previously, the current estimate is that the DI Trust Fund will
become insolvent in 2016.18
Although the overall retirement and disability system
(represented by the full cylinder in
the top left corner of the diagram) has enough assets to avoid
insolvency and pay fully scheduled
benefits until 2033, the DI programs more immediate financial
concerns are critical. One reason
is that the two trust funds are legally separate: benefits for
the disability program cannot be paid
out of the retirement trust fund or out of payroll taxes
dedicated to the retirement program. Only
a change in the law can alter the ratio of payroll taxes going
to both the retirement and disability
trust funds. 17 See http://www.ssa.gov/OACT/STATS/table4a2.html.
18 See http://www.ssa.gov/OACT/TR/2014/index.html.
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The disability programs more immediate financial troubles offer
a potential window of
opportunity before 2016 for Congress and the president to reform
the DI program. Those reforms
can be designed to not only provide long-term solvency but also
reform the fundamental structure
of the program to provide support for individuals who are
temporarily or partially disabled while
they prepare to return to work. Improving the frequency of
returns to work not only offers
potential benefits to the current retirement program but also
makes some proposed retirement
program reforms easier to administer. Enabling more people to
return to the workforce especially
benefits reforms that include individually directed retirement
savings accounts; balances in those
program designs are not generated by insurance formulas but
instead rely on contributions and
compounding returns. Return to work facilitates accumulations in
such accounts.
Current Program Dynamics
Three important issues when considering disability in the
context of pension reforms are first, the
important role that retirement and disability program benefits
play in the financial security of
millions of Americans; second, the current financial position of
both disability and retirement
systems as they relate to the US fiscal position; and third,
cyclical components to applications
and awards across both programs.
The Great Recession, along with the lingering high level of
unemployment since that
time, has increased disability applications and rates of awards.
In addition, elderly workers who
have exited the workforce involuntarilyahead of their planned
retirement datesas a result of
health or economic dislocations during and since the Great
Recession have relied on the OASI
program for income.19 Reforms should account for those dynamics
in the same way that the
19 For more on involuntary retirement and its impact on
financial and holistic well-being, see Seligman (2014).
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initial US Social Security program design was a response to the
plight of elderly poverty in the
midst of the Great Depression.
Importance of the Social Security Program in Retirement and as a
Safety Net
Researchers have long recognized the role Social Security
benefits play in securing a dignified
and secure retirement.20 DI currently covers about 90 percent of
the workers covered by Social
Security.21
Social Security retirement benefits provide income security for
millions of Americans.
Approximately 65 percent of all beneficiaries rely on Social
Security for 50 percent or more of
their income, and 36 percent rely on Social Security for 90
percent or more of their income (US
Social Security Administration 2012). According to the SSA,
approximately one out of every
four people age 20 or older will become disabled before age
67the full retirement age.22
According to DeCesaro and Hemmeter (2008), the DI program also
provides most of the income
for DI beneficiaries, with 71 percent of beneficiaries relying
on DI for 50 percent or more of
their income and nearly one-half relying on DI for 90 percent or
more of their income.23 The
Social Security retirement program accounts for 74 percent of
benefits paid, whereas the
disability program accounts for 16 percent. That the program
pays a large portion of benefits is
of note, but only as a static measure. Burkhauser and Daly
(2012) note that in 1970, Social
Security Disability Insurance paid a less onerous 10 percent of
the dollars expended by the
20 For a summary of research work about this topic, see Richard
Burkhauser, Alan Gustman, John Laitner, Olivia S. Mitchell, and
Amanda Sonnega, Social Security Research at the Michigan Retirement
Research Center, Social Security Bulletin 69, no. 4 (2009). 20 As
the US Social Security Administration reports, Although men are
more likely than women to be insured, the gender gap is shrinking.
The proportion of men who are insured has remained essentially
stable, with 90% fully insured and 79% insured for disability. By
contrast, the proportion of women who are insured has increased
dramaticallyfrom 63% to 84% fully insured and from 41% to 73%
insured for disability (2013, 12). 22 See
http://www.ssa.gov/pressoffice/basicfact.htm. 23 See table 2 in
that report.
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combined retirement and disability programs. We agree that the
growth rate is disproportional
and of most concern.
The average benefit for a person on DI is not compellingly
large. Measured on a monthly
basis, that amount was $1,129 in June 2013, or just over $13,500
a year. That is approximately
$2,000 more per year than the US federal poverty level and
approximately $2,000 less than full-
time wages at the current US federal minimum wage of $7.25 an
hour.
Data from the Health and Retirement Study (HRS),24 a biennial
survey of Americans
older than age 50, shows that DI and SSI supports in the United
States generally appear well
targeted. Table 1 offers categorical differences in pre- and
post-retirement income.
Groups with replacement rates less than 60 percent (from all
income sources) are set in
boldface in the tableseveral groups have average incomes near or
below the poverty line.
Among those in the HRS between 1992 and 2010, the population
retiring early and receiving
Social Security at the time of retirement generally reported
income replacement rates of 7071
percent. Those receiving disability or other supplemental help
have lower average replacement
rates of 57 percent. The impacts for the latter group are larger
than they would be otherwise
because pre-retirement incomes for that group are lower to begin
withon average, 38 percent
lower. Thus, average retirement income for the more vulnerable
group ($14,458) is roughly one-
half that of traditional retirees ($28,609) and quite near the
official poverty line. Differences in
outcomes are larger for individuals who retire without Social
Security benefits.
24 See http://hrsonline.isr.umich.edu/.
-
18
Table 1. Pre- and Post-Retirement Income By Type of Retirement
and Benefit Receipt, 19922010
Type of benefits received Overall Voluntary retirement
Involuntary retirement
For health reasons For other reasons
For health reasons
For other reasons
Overall Income before retirement $39,711 $33,799 $44,445 $26,638
$37,448 Income after retirement $27,715 $19,424 $32,613 $15,286
$25,202 Replacement rate 70% 57% 73% 57% 67%
1. Supplemental Security Insurance/Disability Insurance benefits
Income before retirement $25,252 $23,583 $24,926 $24,934 $28,862
Income after retirement $14,375 $10,213 $16,931 $14,458 $14,390
Replacement rate 57% 43% 68% 58% 50%
2. Old-Age and Survivors Insurance benefits Income before
retirement $40,338 $34,853 $43,518 $27,796 $36,747 Income after
retirement $28,609 $21,085 $32,106 $16,234 $24,442 Replacement rate
71% 60% 74% 58% 67%
3. No Social Security benefits Income before retirement $49,480
$38,425 $55,703 $30,007 $45,980 Income after retirement $34,407
$19,200 $39,711 $14,526 $35,234 Replacement rate 70% 50% 71% 48%
77%
Sample sizes (N): 5,379 364 3,257 859 899 Source: The data in
this table were generated as part of a larger research study on
involuntary retirees. See Jason S. Seligman (2014), Involuntary
Retirement, U.S. Social Security Program Participation and the
Great Recession, Public Finance and Management 14 (3): 32956. Note:
Income is measured in constant 2008 dollars over the 19922010
period. Boldface indicates replacement rates of less than 60
percent.
The Current Financial Position of the Social Security Disability
and Retirement Programs
The 1983 reforms placed a series of backstop fiscal measures in
place for the disability and
retirement programs. Once a trust fund is exhausted, benefits
are automatically adjusted
downward to be within the level of revenues received from
payroll withholding.
That law is designed to protect the general US budget from
long-term fiscal instability
as a result of any trust fund failure, but it is of limited
valueand not only because of political
-
19
pressures geared toward preserving benefits. A more direct link
to the general budget of the
United States exists through the SSI program and bears
consideration as well. If politicians fail
to reform the retirement and disability systems ability to
preserve worker benefits around the
average of the vulnerable group ($14,458), fiscal impacts will
spill over to SSI and, thus, the
general US budget because that income level is near the poverty
line at which SSI payments
are mandated.
Cyclical and Structural Factors: Impacts of the Great
Recession
The financial crisis that began in 2007 resulted in a large
unanticipated loss of wealth for
millions of people. The US stock market, as measured by the
broad Standard & Poors (S&P)
500 index, lost more than half of its value (falling 56.7
percent) from a peak on October 10,
2007, to a trough on March 9, 2009.25 Housing prices plummeted,
and unemployment rose
quickly to double-digit rates. General confidence in the
financial system was greatly weakened.
Even though the general stock market has recovered, housing
prices are still in the process of
recovering. Unemployment persisted at elevated rates well into
the recovery: unemployment
rates for workers ages 55 to 64 averaged 7 percent for the years
20092010, compared to 3
percent for the period 20052008.26 Although unemployment has
improved, US labor force
participation (LFP) has dropped by more than three percentage
points, from 66.2 percent to 62.8
percent, as shown in figure 3.
25 Data are available from Yahoo! Finance. The S&P 500 index
value at market close on October 10, 2007, was 1562.47. The index
value at market close on March 9, 2009, was 676.53. The National
Bureau of Economic Research, the arbiter of the start and end dates
of a recession, determined that the recession that began in
December 2007 ended in June 2009, roughly coinciding with the peak
and trough dates of the S&P 500 index. 26 Bureau of Labor
Statistics, Labor Force Statistics from the Current Population
Survey, July 2011, http://www.bls .gov/cps/cpsaat1.pdf.
-
20
Figure 3. US Employment to Population Ratio, 19732013
Source: US Bureau of Labor Statistics,
http://www.bls.gov/cps/cpsaat1.pdf; National Bureau of Economic
Research Business Cycle Dating Committee, http://www.nber.org
/cycles/recessions.html. Note: Data adjusted monthly and
seasonally.
Those economic conditions have vastly changed the employment and
financial
landscape for millions of Americans and appear to have had an
impact on the number of
people seeking DI payments (Lindner and Burdick 2013). The
changes in the stock market,
housing market, or labor market clearly do not cause physical
disability, but such changes
lead to an economic decline and increased unemployment
(especially for individuals who
might be considered marginally disabled). Such circumstances
cause people who find
themselves unemployed to have a greater proclivity to
characterize themselves as disabled and
apply for DI benefits. This process is not unique to the United
States; the cyclicality in
disability awards is consistent with findings for several
countries (Bentez-Silva, Disney, and
Jimnez-Martn 2010).
However, the recessions impact on retirement savings has
apparently forced some
older Americans back into the workforce. LFP for those ages 65
and older has increased from
66.2%%
62.8%%
60%%
61%%
62%%
63%%
64%%
65%%
66%%
67%%
68%%
1973% 1978% 1983% 1988% 1993% 1998% 2003% 2008% 2013%
percen
tage
%of%p
opula:
on%
Great&Recession&
periods%of%recession%
-
21
less than 16 percent to 18 percent, reversing a long trend of
declining participation among that
group.27
Further evidence of broad impacts among older Americans is found
in the HRS.
According to data from the HRS, 74 percent of respondents
reported having been affected by the
Great Recession, whereas only 26 percent reported not having
been affected (Hurd and
Rohwedder 2010). Our own calculations, with holistic attitudinal
data from the HRS, speak to
the depth of negative impacts.
Between 2008 and 2010, the average reported level of
satisfaction in the years following
retirement, as compared to the years just before, declined for
those retiring traditionallythat is,
for people who stated that their retirement was a matter of
voluntary preference and who receive
benefits from the standard Social Security retirement program
(OASI). Among individuals who
report that they were forced to retire for reasons other than
health, relative satisfaction declined
by magnitudes roughly 10 times as large, as shown in table
2.
Across the table, moderate negative impacts dominate the changes
experiencedalmost
regardless of groupbut they are much more acute among
individuals who retired involuntarily
as a result of a business closing or layoff (see far-right
column). Notably, a possible pattern of
positive changes may be seen in the four groups receiving
SSI/DI. Those changes may be an
aberration, or that group may have become relatively more
appreciative of their benefits
following the Great Recession.
27 Although two percentage points might not appear to be much,
it stands in stark contrast to the 3.4 percent decrease in overall
LFP and represents 13 percent growth over the 2007 base level.
-
22
Table 2. Measures of Satisfaction by Type and Timing of
Retirement, 20082010
Type of benefits received Traditional retirement Involuntary
retirement
For health reasons
For other reasons
For health reasons
For other reasons
Rating of retirement satisfaction(a) 1. SSI/DI benefits 0.37
0.53 0.26 0.19 2. OASI benefits 0.59 0.75 0.07 0.22 3. No Social
Security benefits 0.59 0.80 0.22 0.40
Comparison of years after retirement to years before
retirement(b) 1. SSI/DI benefits 0.19 0.49 0.42 0.05 2. OASI
benefits 0.42 0.57 0.20 0.05 3. No Social Security benefits 0.43
0.72 0.25 0.38
Changes from 19922008 sample Rating of retirement
satisfaction(a) 1. SSI/DI benefits 0.10 0.03 0.03 0.23 2. OASI
benefits 0.03 0.02 0.01 0.10 3. No Social Security benefits 0.12
0.02 0.12 0.04
Comparison of years after retirement to years before
retirement(b) 1. SSI/DI benefits 0.13 0.05 0.05 0.28 2. OASI
benefits 0.07 0.04 0.01 0.10 3. No Social Security benefits 0.07
0.02 0.19 0.16
(a) Scale is 1 = very satisfying, 0 = moderately satisfying, 1 =
not at all satisfying. (b) Scale is 1 = better, 0 = about same, 1 =
not as good. Source: Authors calculations based on Health and
Retirement Study data for 19922010. Note: DI = Disability
Insurance; OASI = Old-Age and Survivors Insurance; SSI =
Supplemental Security Insurance.
Involuntary retirementwhether experienced as a result of health
problems or economic
dislocationhas been on the rise in the United States; it rose
from 23 percent of retirement
reports in 2000 to 41 percent in 2010. Additionally, some
individuals report being part forced
into retirement, as seen in figure 4.
Figure 4 documents evidence supporting three points.
First, involuntary retirement reports increased in the wake of
the last two recessions.
Second, reports remain elevated for some period thereafter.
Third, impacts following the Great Recession are notably larger
in magnitude.
-
23
Figure 4. Proportion of Retirees Reporting Involuntary
Retirement, 19962010
Source: Health and Retirement Study biennial data, National
Bureau of Economic Research Business Cycle Dating Committee,
http://www.nber.org/cycles /recessions.html. Note: Voluntary and
involuntary reports were based on answers to the following query:
Thinking back to the time you (partly/completely) retired, was that
something you wanted to do or something you felt you were forced
into?
The proclivity to apply for disability payments seems reasonably
correlated to the
involuntary reports data shown in figure 4. DI applications and
awards are shown in figure 5.
Figure 5 details that disability applications and awards are
also linked with recessions.
The Great Recession is again linked with uniquely high
application rates, along with increases in
awards. Overall, applications per thousand insured workers are
5.1 percentage points higher
during recessions, and awards average 2.1 percentage points
higher over the 19652011 period.
Those increases are, respectively, 7.8 and 4.2 times the rates
of application and award in
nonrecessionary times. Lindner and Burdick (2013) suggest that
people with moderate
disabilities who can work but might find difficulty gaining
employment turn to the DI program
during economic downturns, possibly as a means of obtaining
unemployment insurancewhich
is not what the DI program is designed to cover. The next
section returns to that topic and
29% 24% 23% 24% 30% 29% 28%
41%8%
7% 11% 9%6% 6% 7%
4%
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0%5%
10%15%20%25%30%35%40%45%50%
1996 1998 2000 2002 2004 2006 2008 2010
part involuntaryinvoluntary
recession
-
24
provides broader context on those programs prospects. We then
offer some ideas for reform that
we believe are harmonious with savings-based reforms of the
retirement systems.
Figure 5. Disability Insurance Applications and Awards per 1,000
Insured Workers, 19652011
Sources: Social Security Administration, National Bureau of
Economic Research Business Cycle Dating Committee,
http://www.nber.org/cycles/recessions.html.
Social Security, Hardships, and Associated Prospects for
Reform
Recessions are depicted as discrete events, but unemployment
evolves more continuously. That
is also true for the growth of savings in retirement accounts.
The value of those assets, in turn,
constitutes the basis for most retirement wealth.28 Thus,
considering the influence of
28 Seligman and Wenger (2006) estimate the impact of
unemployment on defined contribution retirement savings and find
that unemployment is coincident with negative shocks to equities
prices, which implies that workers may systematically miss
investment opportunities. That might seem to be less the case for
disability; an upshot of the situation would be that equity
investments might do a better job protecting against disability
simply because disability risks and financial risks are not
naturally coincident. However, in light of figure 5 and recent DI
application and award increasesas well as the findings of
Bentez-Silva, Disney, and Jimnez-Martn (2010) noted earlierwe take
seriously the idea of a persistent, countercyclical, boom-bust
cycle in disability awards.
Awards
Applications
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0
5
10
15
20
25Periods corresponding to recession
numbe
r per 1,00
0 insu
red worke
rs
Data: Applications ansd Awards - Social Security Administration;
Recessions - National Bureau of Economic Research
-
25
unemployment and financial shocks on the Social Security
Disability Insurance system in a less
discrete fashion makes sense before turning to evaluating how
specific plan reforms might
impact human and fiscal outcomesincluding the social goal of
helping able-bodied individuals
return to meaningful work.
Although the proportion of the population receiving Social
Security retirement benefits
has been steadily increasing over time, the disability program
has been growing faster. The
annual rate of increase for the number of beneficiaries in the
retirement program from 1971 to
2011 was 1.6 percent. However, for disabled workers, the rate of
growth was 2.2 percent (US
Social Security Administration 2012). Disabled beneficiaries
include both adults and children.
Between 1980 and 2013, spending on SSI and DI benefits grew from
0.7 percent of GDP to 1.2
percent of GDP (Liebman and Smalligan 2013).
For some time now, research has suggested that the number of
applications to the DI
program is highly correlated with the unemployment rate (for
example, see Rupp and
Stapleton 1995).
So far this paper has discussed cyclical disability application;
however, structural changes
to the US economy must be considered as well. In particular, the
United States has experienced
diminished LFP rates, as shown in figure 6.
Declining LFP, increases in the Social Security full retirement
age, and a decline in
private-sector employer pension coverage all factor into reasons
one might expect further long-
run increases in DI applications. Interestingly, Daly, Lucking,
and Schwabish (2013) cite
increased female LFP and more women reaching disability-insured
status as another structural
component leading to one-time increases in DI and SSI claims.
Notably, as far as DI goes,
increases in female LFP have increased payroll withholding
contributions as well (Daly,
-
26
Lucking, and Schwabish 2013). The challenge of meeting the
higher disability awards resulting
from persistently lower LFP alone would overwhelm the trust fund
over the medium run,
according to historic trends. However, evidence shows that DI
applicants have become more
aggressive in appealing decisions. The experience of one leading
disability attorney highlights
the evolution of the disability application process and of legal
representation among applicants:
When we started, [Charles] Binder told me, I dont think anybody
else was advertising. Whats more, most people who applied for
disability were denied and never had a hearing. Binder, and the
lawyers who followed him, changed that. Ive created some of the
problems for the government because so many people appeal, Binder
says.
When he started in 1979, Binder represented fewer than 50
clients. Last year, his firm represented 30,000 people. Thirty
thousand people who were denied disability appealed with the help
of Charles Binders firm. In one year. Last year, Binder and Binder
made $68.7 million in fees for disability cases. (Joffe-Walt
2013)
Figure 6. US Labor Force Participation over Economic Recoveries
Following Recessions, 19732013
Source: Labor force participation statistics from the Bureau of
Labor Statistics (19732014); recovery statistics from the National
Bureau of Economic Research Business Cycle Dating Committee,
http://www.nber.org/cycles /recessions.html.
61#
62#
63#
64#
65#
66#
1# 4# 7# 10# 13# 16# 19# 22# 25# 28# 31# 34# 37# 40# 43# 46# 49#
52#
Labor#Force#Par5cipa5on#
##############following#recession:#1973?2013##
Months#into#Recovery#
Data#source:#[1]#LFP#??#BLS#(1973?2014),#[2]#Recovery#??#NBER#Business#Cycle#Da5ng#CommiSee#
Percen
tage
e#
recent#recovery#?#US#
average#recovery#?#US#
-
27
Lindner and Burdick (2013, 2) find that almost all of the
increase in the number of total
applications and allowances during recessions is due to an
increase in applications that are
initially rejected. Moreover, National Public Radios This
American Life recently documented
the growth of DI legal services targeting appeals (Joffe-Walt
2013). Further evidence reveals that
the Great Recession is again uniquely challenging for DI
finances. The economic downturn and
subsequent slow economic recovery have led not only to an
increase in DI applications and
awards but also to a further imbalance of revenues coming in
that provide financial support to the
program and benefits paid out.29
Further in the way of structural considerations, Coe and
Rutledge (2013) find that during
the Great Recession, not only did award and application rates
increase compared to other
recessions but the award-to-application ratio also increased.
Generally, that ratio declines during
recessions. The authors posit that one reason for the difference
may be that the Great Recession
changed award standards or enabled applicants to more easily
prove that their employment
prospects were weak or nonexistent. For example, Coe and
Rutledge (2013, 19) partly conclude
that individuals who apply during recessions are more likely to
have a recent work history and
to have worked full-time than those who apply during booms. They
also suggest that
determinations of disability may have been more flexible or
lenient:
With the fact that there have been no substantial programmatic
changes to the disability programs, we interpret our findings as
evidence of a substantive shift over the last decade in how the
disability application decisions and the disability awards have
been made, which cannot be explained by observable characteristics
of the applicants. (Coe and Rutledge 2013, 20) The DI program is
intended to provide income support to individuals with
permanent
disabilities who cannot work. However, as discussed previously,
some people with marginal
29 See http://www.ssa.gov/OACT/STATS/table4a2.html.
-
28
disabilities who can work might seek DI benefits during tough
economic times when jobs are
harder to find (the marginal merit of those applicants has
tended to reduce award rates in
previous recessions). That fact suggests that some people on DI
might be able to work if jobs
were available. In fact, the SSA has programs in place to help
return such people to the
workforce. Yet, as Autor and Duggan (2010) explain, efforts to
return marginally disabled
people to the workforce have been a failure (see figure 7).
That failure is partially the result of moral hazard problems
inherent in the program. The
program may be failing to insure only those with permanent
disabilities, or the program may
inhibit LFP among clients with marginal disabilitiesthat is to
say, those who could find work.
One reason people on DI might hesitate to look for work is that
successful transition to
the workforce eventually detaches them from the health insurance
they likely received through
the Medicare and Medicaid systems, especially because few
low-wage jobs currently offer such
benefits. The health care exchanges established under the ACA
may help to ease those concerns;
however, that result is unclear at the time of this writing. The
ACA is being phased in over the
next several years and currently faces many implementation
challenges.30
Recent work by Blahous (2014) points out that although the ACA
creates new fiscal
burdens for the federal government, impacts are dependent on
states decisions about whether to
expand Medicaid eligibility as allowed under the ACA. Notably,
because other social welfare
programs vary on a state-by-state basis, interactions impacting
DI uptake may therefore vary as
well. Although, generally, health insurance purchased through
the exchanges will have real costs
for the majority of participants, Medicaid requires no premiums
or out-of-pocket expenses,
which could create an additional incentive to apply when DI
benefits are between 100 percent
30 See
http://www.hhs.gov/healthcare/facts/timeline/index.html.
-
29
and 138 percent of the federal poverty level. Whether that
incentive is enough to motivate
additional DI applications in states engaging in the full
expansion of Medicaid under the ACA
will have to be researched over the next few years.
As stated previously, the proper role for DI is to be an
insurance program targeting
individuals with physical and mental disabilities that preclude
work. Figure 7 documents exits
from DI over the period 19922012.
Figure 7. Percentage of Social Security Disability Insurance
Recipients Leaving the Program for Not Meeting Medical Criteria,
19922012
Source: Social Security Administration, National Bureau of
Economic Research Business Cycle Dating Committee,
http://www.nber.org/cycles/recessions.html. Note: This figure
describes exits related to health over time. Notably, the Americans
with Disabilities Act (1990), which worked to improve accommodation
for disabled workers, does not seem to be associated with any
long-term trend of increased exits.
A well-functioning program would display relatively smooth exits
over time. Spikes, if
they occurred, would be the result of sudden improvements in
therapy or accommodations that
improve job prospects.
DI exits rates
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Periods(corresponding(to(recession((NBER)
-
30
The spike in figure 7 occurs during the Clinton administration
and is a result of increased
emphasis on case review. The ADA improved accommodation
requirements and disabled
workers rights, but it is not associated with any meaningful
spike or change in long-term exit
trends. A similar spike occurred during the Reagan
administration.
Recently, a few proposals for reform have emerged that are worth
considering. (See, for
example, Autor and Duggan 2010; Liebman and Smalligan 2013.)
Some of those reforms are
less intrusive on retirement program reforms, whereas others
should be considered only in
tandem with those programs.
Social Security Disability Reforms Considered in Terms of
Integration with the Social
Security Retirement Program
Next, we turn to some reform proposals with the potential to
return the DI program to its original
intended purposethat is, to providing income support for
individuals who cannot work because
of permanent disability. The following reforms have the
potential to help individuals who are
marginally or temporarily disabled return to work. These reforms
also return the DI program to
fiscal sustainability.
As with many other issues that constitute the social insurance
reform realm, changes in
personal and employer behaviors have contributed to the relative
importance of the system.
Opportunities to obtain DI coverage are lacking outside the
public program. In the United States,
short-term DI is available to only 37 percent of the civilian
workforce, and just one-third of
civilian workers have access to long-term disability coverage
through their employers. By
comparison, 74 percent have access to health care benefits, 69
percent have access to retirement
benefits, and 62 percent have access to life insurance benefits.
The relative lack of access does
-
31
not suggest a lack of interest in DI on the part of US workers.
The Bureau of Labor Statistics
estimates a take-up rate of 98 percent for short-term and 95
percent for long-term coverage, a
much higher take-up rate than for the other worker benefits
mentioned (Solis and Hall 2010).
Thus, workers offered DI seem to highly value it.
Personal and employer responsibilities must be considered anew
in the context of
reforms. As Burkhauser and others (2013, 39) state,
Because employers bear no direct responsibility for funding
benefits paid to former employees, employers have no direct
financial incentive to accommodate and rehabilitate employees who
become impaired. Incentivizing employers to make greater
investments in accommodation and rehabilitation by creating a
scheme that makes employers internalize some or all of the costs of
moving employees onto long-term disability could curb DI growth by
more effectively aligning incentives. Autor and Duggan (2010)
propose experience-rating employer contributions to the
system. That rating would be based on the history of employees
disability applications. It
would partially determine future contributions and require
employers to cover up to the first
two years of disability through private group DI policies. That
course of action would remove
a potential moral hazard problem whereby businesses whose
employees exhibit higher
instances of disability would not be able to shift those workers
to a disability program without
direct costs. If an employer is required to cover the first two
years of worker disability
through private market insurance, the employer may have more
incentive to either keep
partially disabled workers employed or improve working
conditions to reduce the overall
incidence of disability.
Such program innovations hold promise in as much as they expand
the private system
and thereby reduce the burden of retirement system reforms to
address disabilityat least,
directly. However, employers motivation to protect
experience-rating markups in the public
system and avoid two-year claim payouts within their group
policies might well create perverse
-
32
incentives for business. Businesses may choose to avoid exposure
to both public and private
premium increases by avoiding hiring employees prone to
disability claimsincluding those
who might be returning to the workforce following a disability
claim. Hence, we do not believe
these designs as they now stand would create a better DI
system.
Two additional design elements would improve proposals to
increase the role of
employers in the DI system: (1) symmetric penalties that
increase premiums for businesses with
implausibly low claim rates, as measured against the overall
rates in industry occupation
brackets, and (2) insurance premium discounts for hiring and
maintaining previously disabled
persons returning to the workforce. To adjust premiums using
experience ratings appropriately,
experiences with disability claims in different industries would
have to be measured to assess
differences in disability incidence rates (for example, sales
jobs versus manufacturing jobs).
Differences among employers within each general occupational
industry would then also have to
be measured. A difficult, but necessary, task would be devising
some way to ensure that
employers in industries with typically higher levels of
disability incidence rates are not avoiding
hiring disabled workers just to keep their experience rating
artificially low.
Again, the goal of any reform to the public DI system should be
to give primary
consideration to helping individuals with disabilities who can
work return to or remain in the
workforce while also providing long-term financial support for
those who cannot work. That
focus will improve the programs effectiveness as well as its
fiscal position. Although more
research in this area is necessary, with such innovations in
place, broadening the private
disability system is more appealing.
The application and evaluation process is another area in which
opportunities exist for
improvement. Liebman and Smalligan (2013) point out that
currently, the financing of the
-
33
evaluation process is handled in a way that can incentivize
disability application reviews to be
rushed, thereby detrimentally impacting the programs
finances.
Generally, cutting costs in the application and evaluation
process allows the SSA to
reduce the amount of money it needs from Congressional
appropriators, whereas the cost of
higher benefits is a burden that is automatically paid out of
the dwindling trust fund. Given that
denied applicants often appeal decisionsinducing a review, which
is covered by the
discretionary budgetthe net incentive effect of the current
evaluation systems financing tends
to increase marginal awards that burden the trust fund over the
long run. That dynamic can make
the program more inclusive at the margin, thus reducing
discretionary expenditures up front and
increasing long-term trust fund expenses. That result is not
without cost to other program
beneficiaries: in the wake of trust fund exhaustion, the most
eligible claimants will also
experience benefit cuts and associated hardship, because of such
perverse incentives.
Changing that review systems financing seems to be a fruitful
opportunity. Presumably,
if the SSA has more dedicated funding to handle the review
process and to conduct continuing
disability reviews31 for individuals currently receiving
benefits to determine continued eligibility,
the number of applications initially awarded may decline, and
individuals who receive benefits
but whose disability no longer prevents them from working could
be removed from the program.
However, improving the SSAs funding for disability reviews seems
to be an even more valuable
opportunity when it is considered in light of the dynamics of
the Autor and Duggan proposals.
A system in which private insurance offerings are expanded
presents an opportunity for
randomization of a measured subset of initial reviews between
private and public parties. Such a
randomization would serve an audit function and help to manage
moral hazard at the entry point.
31 See http://www.socialsecurity.gov/ssi/text-cdrs-ussi.htm.
-
34
Much like the experience-rating proposal,
age-occupation-industry experience ratings should be
applied to the evaluation process. Those ratings would likely
improve public confidence in the
fairness of the system.
Those reforms feed into the overall reform framework; we
strongly believe that partial
and temporary awards have a place in the DI systemsomething the
current Social Security
Disability Insurance system does not allow. Administration of
any partial or temporary disability
awards would require mandatory continuing review to ensure
compliance. We suggest annual
reviews in a system such as Autor and Duggans, randomized along
the lines discussed earlier, as
presenting the opportunity for the system to encourage return to
work, and, at the very least, not
penalize an individuals decision to return to work.
As stated previously, under the current Social Security
Disability Insurance program, a
person is either disabled or not. A person suffering from back
pain who is able to work part time
is not considered disabled; another who cannot work even part
time but who is expected to
recover in 6 to 10 months is also not considered disabled.
Hence, neither person would be
eligible for disability benefits under the current system. One
option for reform would be to allow
individuals who have a disabling limitation that would allow
them to still work 20 hours per
week to receive a partial disability awardin this case, 50
percent. The partial award would be
time limitedto one to two yearsand would require the beneficiary
to undergo a disability
review by the SSA before benefits could continue after the
initial time period has expired. That
sort of policy is notable in that it may increase the number of
people on the DI rolls yet reduce
program outlays in the long run; it could also increase the tax
base supporting the program.
The same idea underscores the reform concept of a temporary
disability award. If a
person suffers from a condition that precludes any work, but the
applicant could recover with
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35
time or treatment, partial or full benefits could be awarded for
a limited timeagain, one to two
years. At the end of the period, the benefits would cease
subject to a review of the beneficiarys
medical condition. A basic schematic diagram of this sort of
design is offered in figure 8.
Figure 8. Reformed Program Design with One-Year Continuation
Review
Note: ACA = Affordable Care Act (2009); ALJ = administrative law
judge; DI = Disability Insurance; ER = employer (or previous
employer); HI = Medicare Part A Hospital Insurance; OASI = Old-Age
and Survivors Insurance; SSI = Supplemental Security Insurance.
The big difference between the proposed system and the current
one is the proposed
systems integration of the eligibility determination with
employers responsibilities under the
ADA. Also, the initial DI award is now always temporary, with a
mandatory one-year
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36
continuation review. In the proposed system, the responsibility
for that review would be shared
between the employer (or previous employer), denoted ERwho would
have to provide
private DIand the SSA.32
Alternatively, under a reformed system that involves a private
market, in which
employers pay the premiums to cover the first two years of
disability payments, at the one-year
mark the reviewer would evaluate the workers ability to return
to his or her previous position,
either full or part time. The positive experience-rating
incentive should be large enough to
motivate employers to rehabilitate employees whenever such
rehabilitation is useful and
humane. At the second-year mark, the time of potential transfer
to the DI trust fund,
reevaluation should be broader in terms of opportunities for
employment outside the employer
and occupation previously held. Again, conditional on useful and
humane employment, the
design affords an opportunity to acknowledge the dignity
afforded by the ability to work, as
well as the dignity of full or partial exit from the workforce
in the face of significant suffering
resulting from disability. Of course, further research into the
costs and benefits of such a
systemand the effects that such a system would have on LFPwould
have to be conducted.
From a fiscal policy standpoint, getting able-bodied people back
into the workforce increases
the DI and OASI trust fund contributions and reduces likely
dependency on public health
insurance. From the households perspective, the policy leaves
them with better income and
better retirement income prospects.
32 Under this basic scheme, individuals with verified medical
conditions, for which the impairment is permanent or likely to
result in death within 12 months, would receive permanent
disability benefits and not be subject to a mandatory one-year
review.
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37
Summary and Conclusions
Broadly speaking, the Social Security Disability Insurance
program and the retirement program
require reform. The DI program is fiscally unsustainable in both
the short and long run and fails
to provide a structure for individuals with disabilities who
could return to work (part or full time)
and find gainful and dignified employment. Absent reform or
legislative funding changes, if the
Social Security Disability Insurance trust fund becomes
insolvent in 2016, the reduction in
benefit payments to disabled beneficiaries, which is meant to
preserve the US budgets
sustainability, will create discrete shocks in the treatment of
disabled workers; a result that
strikes the authors as unfair. Additionally, the welfare
component of the program, SSI, would
likely experience a spillover effect; thus the general fund of
the US federal government would be
impacted negatively.
Many people have suggested that the OASI and DI trust funds
simply be merged. Merely
merging the two trust funds or reallocating the payroll tax
ratio to provide more funding for the
disability program at the expense of the retirement program
would create a difference in the
intergenerational treatment of older workerssomething else that
strikes the authors as unfair.
That merging also would remove any pressure that Congress and
the president might feel in 2016
to offer meaningful program reforms.
Interfund borrowing is a short-gap legislative option, in which
the disability trust fund
would borrow from the retirement trust fund. All borrowed funds
would have to be paid back
with interest. The benefit of interfund borrowing is that it
provides a mechanism to maintain
coverage for disabled beneficiaries at fully funded levels, but
it has the additional benefit of
public transparency, whereby the public (and policymakers) will
have to bear witness to the
continued financial weakness of the DI trust fund. An annual
accounting of how much the DI
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38
trust fund is borrowing from the retirement trust fund would
keep continued pressure on
legislators to pass fundamental reforms to the program.
We believe that the best opportunities for reforming the social
insurance system will
honor personal and public finances and will be holistic in
scope. We further believe that such
designs are feasible. What those proposed reforms require is an
incremental design approach,
with long-term phase-ins and consideration of the roles of each
social insurance component,
along with a reconsideration of the roles and responsibilities
that private insurance, employers,
and individuals have in society.
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39
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